Today, a governance proposal comes into effect, leading to a 25% reduction in inflation on AAVE. Let’s take a look at this new development for the popular decentralized finance (DeFi) protocol.
Aave reduces token inflation by 25%
On Tuesday, AAVE token inflation was reduced by 25% following a community vote, as reported by Marc Zeller, founder of the Aave Chan Initiative (ACI):
The governance has decided: the issuance of AAVE tokens will be further reduced by 25% starting tomorrow. Buybacks will remain unchanged.
To understand the scope of this new measure, it is necessary to briefly review how AAVE tokens are created, namely the Safety Module. The Safety Module acts as a kind of insurance for the protocol, providing a certain return against the possibility of using some of the funds committed to the Safety Module to respond to an emergency. For example, the funds in the Safety Module could be used in part to cover losses caused by a hack, drawing up to 20% of the amount staked:
In return, the yield in AAVE tokens is 3.94% per year, but this rate must now be reduced, as must the maximum slashing (the famous 20% mentioned above). This is what TokenLogic proposed when it published this governance proposal on July 10:
By reducing the Slashing from 20% to 10%, the risk exposure is halved. With an improved risk profile, AAVE emissions should be revised downwards to 260 AAVE/day, or 3.25% at current deposit levels.
In addition, a similar reduction has been made to the part of the Safety Module dedicated to ABPT V2. In short, ABPT V2 is proof of deposit from the wstETH/AAVE liquidity pool on the decentralized exchange (DEX) Balancer (BAL), and it is possible to deposit this proof in the Safety Module to generate more returns.
Thus, this governance proposal received a unanimous vote in favor, and we can also note that the ACI’s vote accounted for more than 63% of the 443,000 AAVE tokens committed to this vote:
With regard to the AAVE token itself, this measure may be beneficial in the long term, as reducing its inflation automatically preserves the relative value of holders’ assets through less dilution.
At the time of writing, the price of AAVE stands at $290, down 6% over 24 hours. Like other altcoins, the token is one of those that have not yet managed to exceed their all-time high from the previous bull run, which was recorded at just over $660 on May 18, 2021.
